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Probity, governance and procurement

Monica Kelly, B Comm, LLB, MALP

Prevention Partners NSW… a gram of Prevention is worth a kilo of cure ™

PROBITY• ‘integrity, uprightness; honesty’ (Macquarie

dictionary, Revised Third Edition, 2002)• “…a risk management approach to ensuring

procedural integrity” (Probity Guidelines for Procurement, June 2012, Government of Tasmania)

• A tool to avoid litigation (?)

Principles of probity and governance in procurement

Please jot down the probity principles that are important to you.

Put this note to the side for now.

Case studyStrathfield Municipal Council, September 2015: • Procurement of service from IPG and

associated expenditure;• Procurement of legal services and

associated expenditure;• Appointment of an external auditor;• Conduct and performance as Trust

manager of the Hudson Park Reserve Trust.

What is not probity

• Probity is not concerned with the end result - but more how it was achieved

• Probity does not guarantee that the pre agreed assessment criteria is the correct criteria – experience does

• Probity cannot insure that the completed project will not be over budget

• Probity cannot protect Council from all risks

Principles of probity in procurement

• Fairness, consistency and transparency of process;– Provide all parties the same information;– Adhere to the same rules for all tenders;– Avoid bias, both real and perceived;– Comply with adopted policy and probity plan

(if these exist);– Report to Council when necessary.

Principles of probity in procurement

• Transparency:– Generally, as much information you can make

available to the tenderers the better– Council should avoid moving into closed

session, unless necessary– Council should not rely on the power to

rescind or amend decisions made by resolution

Case studyStrathfield Municipal Council: Appointment of external auditor.• The incumbent auditor’s term ended on 30

June 2012. On 22 January 2013 Council called for tenders.

• For reasons unknown, the incumbent failed to make a submission.

Case studyAppointment of external auditor.• A tender panel considered submissions

and recommended the appointment of Pricewaterhouse Coopers.

• The panel’s recommendation was not tabled for Council’s decision, rather it was replaced with a recommendation to call for fresh tenders, drafted by a Director.

Case studyAppointment of external auditor.• A fresh tender was called, the specification

was amended. The amendments would likely favour the incumbent. The amendments were approved by the Director.

• The incumbent lodged a submission.

Case studyAppointment of external auditor.• The assessment panel ranked the

incumbent fourth, however the recommendation (drafted by the same Director) was to reappoint the incumbent auditor.

• Council rejected the recommendation.• The Director was found to have engaged

in maladministration.

Principles of probity in procurement

• Accountability in relation to decision making; – Pre agreed timeframe of activities;– Assign and document assignment of roles of

decision-makers;– Pre agreed criteria and methodology available

to all parties;– Pre agreed weightings of criteria;– Record keeping standards met;

Principles of probity in procurement

• Open competitive process avoids: – Misuse of market dominance;– Cartel conduct;– Restrictive trade practices;– Price fixing and bid rigging.

Case studyStrathfield Municipal Council:Appointment of IPG.• Council’s General Manager was directly

propositioned by International Property Group (IPG) by email.

• Council retained the services of IPG for two years to provide property advice and sales coordination.

Case studyAppointment of IPG.• Council retained IPG on a monthly retainer

of:– $20,000 (+ GST); and – 0.5% (+ GST) of the sale price of property

subject to IPG’s advice. • The initial letter of offer was for a term of

12 months ($240,000).

Case studyAppointment of IPG.• The new Finance Manager realised that

this expenditure was not included in the 2011/2012 budget and raised it as a concern.

• Because of her diligence an additional $240,000 was included in the budget as ‘Strategic Planning’.

Case studyAppointment of IPG.• Council ultimately paid IPG $899,937.50

for their services.• The OLG found that the General Manager

and other senior staff authorised expenditure that amounted to ‘serious and substantial waste’.

Principles of probity in procurement

• Confidentiality:– Confidentiality agreements signed by all

decision-makers and advisors;– Record keeping of confidentiality agreements;– Confidentiality of storage of all tender records.

Principles of probity in procurement

• Identification and resolution of conflicts of interest;– Conflict of interests declarations are to be

signed and recorded by all decision-makers at beginning of project;

– Revisit declarations upon receipt of submissions and before determination;

– Follow the Code of Conduct

Case studyStrathfield Municipal Council: Legal services• Council called for expressions of interests

to form a legal panel on 4 May 2010. Council resolved to appoint firms to such a panel on 1 March 2011.

• Records were unavailable to substantiate the assessment and recommendation.

Case studyLegal services• No credible reasons were provided to

explain the time delay or the lack of records.

• Specifically, records affecting Council’s legal department up to May 2013, including emails to and from the Principal Solicitor, had been deleted.

Case studyLegal services• Council spent over $2 m on legal fees in 3

years since 1 July 2011. 80% of this expenditure was made to a single provider.

• Regardless of the lack of records, a fee estimate was discovered that ranged from $100,000 and $250,000. No tender or EOI was conducted.

Case studyLegal services• A letter from that firm provides that the

cost of particular proceedings was estimated to cost up to $400,000. Still, tenders were not called for.

• $197,272.48 of legal services were incorrectly reported as ‘consultancy expenses’. Further, no summary of the proceedings were reported on.

Principles of probity in procurement

• Monitoring and evaluating performance:– Keep awake to evidence of misleading or

deceptive conduct;– Use probity plans and reports;– Document probity concerns that arise and

how these were dealt with;– Consider probity audits; – Comply with adopted policies, procedures and

guidelines;

Principles of probity in procurement

• Accountability in relation to decision making (continued); – Use clear and readily available delegations;– Proper recording of decisions, who made

them and reasons for the decisions– Ensure process is fully documented,

particularly if it deviates from the probity plan or adopted procedure.

Case studyStrathfield Municipal Council: Hudson Park Reserve Trust• Hudson Park is Crown land, managed by

Council under a Trust agreement. Hudson Park is a golf course.

• In July 2009 Council called for tenders for the redevelopment and management of the golf course and driving range.

Case studyHudson Park Reserve Trust• The tender closed on 17 August 2009.

Council had received only one submission from the incumbent (‘Submission 1’).

• On 18 August 2009 Council received a submission from another tenderer (‘Submission 2’).

• Council considered both submissions.

Case studyHudson Park Reserve Trust• Submission 1 complied with the

requirement to submit a conforming tender, Submission 2 did not.

• Submission 1 passed all six criteria. Submission 2 passed one criteria, failed one and did not satisfy the other four.

Case studyHudson Park Reserve Trust• The Council accepted the

recommendation to reject both submissions and enter into direct negotiations.

• After negotiating with both tenderers a draft licence was awarded to the second tenderer, Titanium Golf Management Pty Ltd.

Case studyHudson Park Reserve Trust• At the time Titanium took occupation of the

golf course:– It did not hold the requisite licence to

undertake operations;– Negotiations had not concluded; and– Council had not resolved to award the

contract to Titanium.

Case studyHudson Park Reserve Trust• The license fee was $40,700 per month.

Before Council executed the license agreement Titanium fell into arrears.

• By January 2012 Titanium owed Council $162,800.

• By March 2014 the debt had grown to $400,175.04.

Principles of probity in procurement

Please retrieve your note.

What have I missed?

Common governance errors

• Failing to have all panel members aiming for the same goal

• Failing to fully scope the works and understanding the RFT from the contractor’s perspective

• Reading into submissions information that is not actually there

Common governance errors

• Failing to consider conflicts of interests from the ‘reasonable person’s’ perspective

• Inadvertently changing elements of the tender so that the changes become substantial

• Failing to adequately apply ample time • Failing to properly debrief the

unsuccessful tenderers

The legal framework

• The main party Council needs to be wary of in relation to legal challenges is a disgruntled tenderer who feels that the process was unfair

• The other party that now looms large is the Australian Competition and Consumer Commission (ACCC)

The legal framework

• The successful tenderer may also have grounds to commence proceedings:

Secure Parking Pty v Woollahra Council [2016] NSWCA 154

Secure Parking Pty v Woollahra Council

• The Appeal Court found that no contract was in fact formed because there was no ‘meeting of the minds’.

• This appeal overturned the matter in the first instance that was found in Council's favour.

Secure Parking Pty v Woollahra Council

• The contract was awarded through Council resolution, however, no contract in fact existed because the parties had not agreed on the type and form of security required by the contract, and the commencement date of management periods for each car park.

The legal framework

• A disgruntled tenderer may have grounds to commence proceedings for:– breach of a tender process contract;– misleading or deceptive conduct under the

Competition and Consumer Act 2010 (Cth)– negligent misstatement;– estoppel; and– challenges based on the application of administrative

law remedies - such as for a lack of procedural fairness

The legal framework

• The ACCC can also prosecute for: – misuse of market dominance; – anti-competitive conduct; – price-fixing; – bid-rigging; – restricting outputs in the production and supply chain;– and other actions

The legal framework

• Other Acts that may apply at different times are: – the Government Information (Public Access) Act

2009; – the Public Interest Disclosures Act 1994 and the

Ombudsman Act 1974 both of which gives the Ombudsman powers of investigation of complaints

Probity auditor v’s probity advisor

• A probity auditor considers the project poste haste• A probity auditor can make recommendations for the

future• A probity advisor is part of, yet independent from, the

project from the start• A probity advisor can help avoid risks during the

project

What does a probity auditor do?

• A probity auditor: – Reviews the documentation;– Considers the manner in which decisions

were made and reported;– Appraises the record keeping and protections

of confidentiality;– Evaluates whether the process was in

keeping with relevant legislation, policies and guidelines, including a probity plan; and

– Reports on the findings.

What does a probity advisor do?

• “If you use your probity advisors well they represent an independent, experienced and objective voice to support your successful outcomes. They can be a sounding board, a source of procurement expertise and experience, and commercial sensibility” (Probity + Procurement = Successful Outcomes, Pitcher Partners)

What does a probity advisor do?

• Probity advisors can:– help decide which process of tender to select– keep an independent eye on the process

(very useful with contentious projects)– assist with selecting and weighting criteria– draft and ‘keep alive’ the probity plan– draft a probity report highlighting what areas

were managed well and what challenges were met

Probity plans

A probity plan outlines the process that will be undertaken, including:• Identifying the roles and responsibilities of

parties to the tender process, including tender panel members, experts and others

• Providing a schedule of planned meetings and a timetable for reporting to the Executives and/or Council

Probity plans

• Assigning and storing the form of declaration of interests and confidentiality

• Drafting a final evaluation report including recommendation for the future

Process Contract

• A process contract is separate from the tender contract.

• A process contract comes about when council informs the tenderers of the guidelines that will be used to assess the tenders: Hughes Aircraft Systems International Inc v Airservices Australia (1997) 76 FCR 151

Process Contract

• The purpose of a process contract is to ensure the ‘integrity of the bidding system’: R v Ron Engineering & Construction (Eastern) Ltd [1981] SCR 111 at 273.

• Yet, process contracts are not automatic, but dependant ‘upon a consideration of the circumstances and the obligations expressly or impliedly accepted’: Pratt Contractors Ltd v Palmerston Nth City Council 1 NZLR 469 at [478 – 9].

Process Contract

• We have encountered some council tender documents which attempt to exclude process contracts through the drafting of specific clauses.

• The court would likely read down such clauses and hold that a process contract was created regardless: Cubic Transportation Systems Inc v NSW [2002] NSWSC 656.

Summary

• Keep probity at the forefront of your mind, not as an afterthought.

• Think probity, avoid problems.• Call Prevention Partners NSW for

assistance.

Monica Kelly, B Comm, LLB, MALPPrincipalMonica.kelly@preventionpartnersnsw.com0438 280 621www.preventionpartnersnsw.comLiability limited by a scheme approved under Professional Standards Legislation

Prevention Partners NSW… a gram of Prevention is worth a kilo of cure ™